When precious metals struggle, investors favor bullion over stocks. It is sensible: the gold price can fall but cannot go to zero, while stock prices most certainly can. Thus bullion is safer.
As a result, the ratio of gold equities to the price of gold falls in a weak market. In 2001, the post Bre-X low, the ratio dipped to about 0.16. Over the next six years, during gold's best bull market ever, it averaged twice that.
Then in the 2008 crisis the ratio again crashed, falling below 0.08. Over the subsequent 20-month recovery it almost doubled.
Today, following gold's three-year slide, the gold equities-to-gold price ratio is just 0.05 – far below either of those bottoms. Gold equities are as friendless as they have ever been.
However, the gold price is rising – and setting up for a bull run, because production can't meet demand in the medium term and fiat currency questions abound.
The disjoint means investors have to return to gold equities at some point, because if the market wants more gold it has to support the publicly traded companies who discover, develop, and produce the yellow metal.
The astute John Embry, chief portfolio strategist at Sprott Asset Management, agrees. In a recent interview Embry said the ratio of equities values to the price of gold is the lowest he has seen. He sees now as incredible opportunity to invest in mining because valuations are so low relative both to other investing opportunities and to history.
"I don't think I've ever seen, in the 40-plus years I've been following the sector, the shares cheaper in relation to the price of bullion as they are now," Embry said. He continued, noting that current mining share prices represent "…an historic opportunity."
"Bonds and stocks are grotesquely overpriced and I think gold and silver and mining shares in particular are ridiculously underpriced. Those who figure that out when the inflection point [arrives] are going to make a fortune."
It is also very interesting that trading volumes in junior gold miners ramped up dramatically in the last few months of 2014. Why? Because exhausted investors chose to book tax credits and sold at significant losses…to buyers who had been waiting for the bottom to buy in.
As Clive Maund says rather bluntly within the above graphic, borrowed from his article It Could Not Look Better for the PM Sector Going Into 2015, the enormous volume in the fourth quarter suggests a pretty massive transfer of stock from weak to strong hands.
These strong hands don't plan to sell until they have turned a profit. And I posit they expect profits to come in two waves.
The first is already underway. It is seasonality: the simple fact that the Venture market reliably puts in its best performance of the year between mid-December and mid-March.
Experienced resource investors know all about seasonality. Strong share performance to start the year is a fact of life in the mining sector; in bear markets, seasonality can be the only reliable opportunity to turn a profit. As such, practiced hands were already planning to buy depressed stocks at the end of tax loss selling season, in anticipation of a quick gain.
This year they bought more than usual: once gold bottomed in early November consensus started to build that the worst of the mining bear market is over, giving seasonal players reason to believe the January effect will be amplified this year. So far, so good: the Gold Miners ETF (GDX) is up more than 20% since mid-December while the Junior Gold Miners ETF (GSXJ) is up more than 30%.
The second wave is the real recovery. However, even if the worst is over, the best is still a ways off.
The real recovery will not establish until after the summer doldrums at the earliest, which means a good chunk of the smart money that moved in over the last few months will lock in gains and leave again at the end of the first quarter, with plans to enter again in late summer. I plan to do so with some of my holdings, to be sure – especially those that are already up 30% to 55% in a few weeks.
A quick 40% or 50% gain is great – but re-entering these stocks after the summer will be essential because the real recovery will offer the chance for far greater gains.
To make money in this lull between the bear and the bull requires a different approach. I would love to always rely on the same investing system – buy undervalued stocks and hold them until the market figured it out – but that only works in a functional market.
Today's market ain't functional. It is on life support. It will survive but, until it does, Buy and Hold won't work. This year, moving in and out of stocks based on the time of year, geopolitical events, company-specific news, and metal market developments will be the only way to get ahead.
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